I am a research fellow at the Hoover Institution, at Stanford, and the Cullen Professor of Economics at the University of Houston. I am also a research professor at the German Institute for Economic Research Berlin. My specialties are Russia and Comparative Economics, and I am adding China to my portfolio. I have written more than 20 books on economics, Russia and comparative economics. I blog at paulgregorysblog.blogspot.com.

Barack Obama Wants YOU --- to Pay $10,000 More To Maintain His Entitlement State

Entitlement spending is the driver of deficits, but entitlement reforms, such as raising the retirement age or converting Medicare to grants, collide with the core of liberal statist thinking. President Obama shows no sign of being willing to put entitlement reform on the table. If anything, the American Nanny State is too small. We must look to Europe to see it done right, those of the liberal persuasion believe.

The fiscal-cliff debunked Obama’s campaign myth that deficits would go away if the “rich paid their fair share.” CBO projections conclude that neither the $700 billion tax hike on the affluent nor the sequestration of discretionary spending will dent the trillion dollar annual deficits we face over the coming decade. With the Government Accountability Office declaring the current fiscal path unsustainable, the Obama administration must explain how it can contain the national debt without significant entitlement reform. So far its approach has been to pretend there is no problem.

Obama can offer three ways out, two of which won’t sell:

First, he can say we need more stimulus to get growth underway (E. J. Dionne, The Urgency of Growth). Five years after history’s largest fiscal stimulus gave us the worst recovery of the postwar period, I doubt few will accept the old liberal saw of the Keynesian multiplier. (Fool me once…).

Second, Obama can strain credulity with the bizarre argument that we can cure deficits by having the government “invest” more to raise the economy’s growth potential (See my Obama’s Witch Doctor Economists Propose Reducing the Federal Deficit By Spending More). In other words, we can miraculously spend our way out of deficits! If liberals called Reagan’s trickle down tax cuts “voodoo economics,” conservatives need an even stronger term for such nonsense.

Third, Obama can come clean and tell us by how much our taxes must increase to put us on a sustainable fiscal path without entitlement reform.

With the election safely out of the way, some liberal writers are actually disclosing what they call the “price tag for saving the government roughly as we know it.” They use somewhat dated calculations of the Tax Policy Center (see summary) to conclude that we must raise tax revenues by more than four percent of GDP annually to stabilize the national debt at sixty percent of the economy. Using current GDP figures, this price tag would be a tax increase of $650 billion for one year. (The hard-fought fiscal-cliff tax increase raises only $70 billion per year, by comparison. Apparently that has already been spent on Sandy assistance. Hard come, easy go).

How do we get the extra four percent of GDP in additional tax revenues? An across-the-board income tax increase (from 10 to 17 percent at the bottom, 25 to 43 percent at the middle, and 39.6 to 60 percent, yes 60, at the top) would do the job, the Tax Policy figures tell us. Under this scenario, the average household’s after-tax income would fall by about $9,000, and the rich would lose almost a fifth of their income. (A rather quick solution of the inequality issue, I might say). The average household’s income tax bill would almost double.

A second approach would be to impose a 16.7 percent federal value-added tax (VAT) on spending. The VAT collects taxes efficiently, is difficult to evade, is broad-based, exerts less of a drag on economic growth, and, by the way, is the major source of revenue in Europe. The impact of the VAT on the poor could be partially blunted by rebates, but the average household would suffer an after-tax income loss of around $8,000. (The rich would lose about ten percent).

So we have, at long last, the liberal true confession: The price tag to the average household for stabilizing debt by 2022 without sacrificing current entitlement benefits and discretionary spending is a loss of $9,000 of after-tax income (using across the board tax increases) or of $8,000 (using a 16.7 percent value-added tax). Given the inevitable underestimation of costs, let’s round up to a $10,000 price tag that the average household must pay in additional taxesevery year from now on.

The $10K price tag comes with three caveats.

First, even these mammoth tax increases can fund an entitlement state only half way to the liberal nirvana of Europe’s. Liberals will argue that half-way is not enough, and the din for higher taxes will continue unabated. (If we want Europe’s cradle-to-grave system, we’d have to raise taxes by more than a trillion dollars a year right now).

Second, the $10K price tag gets us only to 2022 when the really bad demographics kick in. At that point we’ll need even more tax increases. But wait, the liberal solution is already at hand: We can raise the VAT to 22 percent or even higher. After all, some of our European brethren pay even more.

Third, demographics allow us to predict social-security costs with some accuracy, but we have no real idea what Medicare, Medicaid, and Obama Care’s insurance exchanges will set us back over the long haul. The $10K price tags assume that Obama Care’s bill comes in on target. If so, it will be the first new entitlement program to do so. Massive cost overruns would send liberal planners back to the drawing board for a much higher price.

Let’s imagine the day of reckoning, say the 2014 or 2016 elections, when American voters are asked whether they are willing to sacrifice $10K of their own income each year to save the government roughly as we know it. It is the responsibility of the Republican opposition to make sure voters understand their choice. The mainstream media and the Democratic Party will do its best to divert attention to minor issues.

The day of reckoning will not be a pretty sight. Liberal statists will paint a bleak picture of the sick denied medical care, the elderly thrown out on the street, and school children huddled in crowded shabby schools as a result of cruel cuts demanded by evil pro-business Republicans. The mainstream media will find any number of horror stories to corroborate the Democrat charges. The Republican candidates must show some spine in the face of this onslaught.

Clinton won in 1991 with “It’s the economy stupid,” in an economy that had taken a slight transitory dip. At the day of reckoning, the Republican’s ad nauseum rallying cry must be: “Are you willing to pay $10,000 out of your own pocket every year to keep Obama’s Nanny State and D.C. spending as is?”

Each Democrat charge must be refuted with facts: We are not ending social security. Instead we are gradually raising the eligibility age to make sure it is there for future generations. This is only fair in a society where we are privileged to live until eighty. We are not gutting public health care; instead we are putting it on a sound footing whereby doctors will actually treat Medicare and Medicaid patients. The public schools, supposedly starved of funding, spend over $10,000 per student (About as much as private school tuition), and the student teacher ratio stands at sixteen. Our public school problem is not spending, but a school system run for the convenience of teachers and administrators.

The question is simple: Are you willing to pay an extra $10,000 each year for bloated public employee rolls, K-Street lobbyists, corn and sugar growers, fat cat crony capitalists who feed at the Washington trough, and political insiders? That’s what the Day of Reckoning boils down to.

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